Euro Touches 1.45 After FOMC
The Federal Reserve cut interest rates by 25bp and the US dollar dropped to a new record low against the Euro and multi-decade lows against the British pound, Australian and Canadian dollars. The amount of easing was exactly what we expected, but the FOMC statement is being interpreted by different people as neutral or slightly hawkish. The Fed acknowledged that growth has picked up in the third quarter and warned that the recent increases in energy and commodity prices could put renewed upward pressure on inflation. However at the same time, they said that the upside risks to inflation roughly balance the downside risks to growth. The price action in the markets today suggests that traders do not believe today’s rate cut will be the Fed’s last. In fact, PIMCO’s Bill Gross told CNBC shortly after the rate decision that further cuts are needed for growth. According to the tone of the FOMC statement, the Fed is in no rush to cut rates, but they do leave the door open for further easing should it be needed. Interestingly enough, the most profound US dollar weakness has been against the commodity currencies. Gold broke $800 and oil futures hit $95 a barrel in after hours trading. Against the Euro, British pound and Japanese yen, the dollar ended the US trading session only slightly lower than its pre-FOMC levels. With non-farm payrolls due in less than 48 hours, further dollar weakness could be limited. Private sector payrolls increased 106,000 last month according to ADP. This was much stronger than expected and suggests that non-farm payrolls could be as high as 125k in the month of October. GDP growth in the third quarter was also the strongest since March 2006, which are all reasons why the US dollar could see some short term strength. Also the statement indicates that financial market conditions are just as important as economic conditions - so keep on top of what the Fed watches with our new weekly report. Not all news today was good. Chicago PMI dropped back into contractionary territory, foreshadowing a possible decline in ISM tomorrow. We are also expecting the Challenger layoffs report and jobless claims, both of which will shed more light on Friday’s payrolls. Don’t forget about personal income, personal spending and PCE; all potential market-movers.

USD/CAD at 50-Year Lows, Australian Dollar Headed for Parity
The biggest beneficiaries of US dollar weakness today are the commodity currencies. The Australian dollar rose to a 23-year high and the Canadian dollar hit a 50-year high! Oil and gold prices are both higher while Canadian GDP was stronger than expected. We once again reiterate that no trend in the currency is as strong now as the downtrend in USD/CAD. With 95 cents behind us, the next logical target is 90 cents and $100 oil is exactly what will take us there. In after-hours trading, crude oil futures surged above $95 a barrel. There is no reason to fade this move. Meanwhile, the Australian dollar will be in play tonight with PMI, retail sales and the trade balance due for release. We are looking for stronger spending and a narrower trade balance thanks to low unemployment and a strong currency. This coincides with our view that the Australian dollar will be the next currency to reach parity with the US dollar.

ECB: Could they Raise Interest Rates?
The Euro touched 1.45 but we have yet to hear a word of caution from the European Central Bank. Why? The answer is simple, inflation. Consumer prices in the month October jumped to a 2-year high of 2.6 percent, well above the central bank’s 2 percent target. Maintaining price stability has long been one of the ECB top priorities. Today’s CPI data illustrates the degree of price pressure that the Eurozone economy currently faces. The ECB needs a strong Euro to bring down inflation, which is why they have not shown any major concern about the level of the currency. In fact, they could even be seriously considering raising interest rates. Yesterday, the central bank of Sweden raised rates by 25bp. Like the ECB, they were worried about growth and the impact of the global market turmoil, but at the same time inflationary pressures were such a concern that they opted to raise rates to the highest level in nearly 5 years. The ECB faces the same predicament, and given the decision by Sweden, we would not be surprised to see a hike from the ECB as well. At bare minimum however, monetary policy will remain hawkish for the remainder of the year.

British Pound Hits 26-Year High
The British pound rose to a 26-year high on the back of broad dollar weakness and speculation that the housing market may not be in as much as trouble as everyone may have initially thought. According to Nationwide, tight supply drove house prices up 1.1 percent in October, the biggest rise in four months. Consumer confidence however has fallen to the lowest level since March, which signals potential troubles ahead for retail sales, but for British pound traders this has mattered little since demand for high yielding currencies and dollar strength or weakness seems to be the primary driver of the currency’s movements at the moment. Manufacturing PMI is due for release tomorrow. The recent strength of the British pound is expected to dampen manufacturing activity.

Carry Trades Take Off After Fed Decision
The Japanese yen crosses were the best performing currency pairs in the market today. Stocks took a wild ride today, translating into equally volatile price action in the carry trades. The Bank of Japan left interest rates unchanged last night, which was right in line with expectations. They also lowered their growth forecasts from 2.1 percent down to 1.8 percent for 2007. Labor cash earnings were also weaker than expected, making the fundamental bias for the Japanese yen very clear.

Kathy Lien is the Chief Currency Strategist at FXCM.